Ok, I've already bought an ipod Nano. I worry a little about my 4yr old staring at the screen too close for hours on end, but it maybe big enough to stick on the seatback. He likes sitting really close to our 42" HDTV, so I can imagine how close he'd hold a nano given the chance.
I'm within the 14day chance to return so I sometimes debate between the nano and a touch. $150 vs $300, I wouldn't get the 16 gig.
We already have a dirt cheap DVD player ($120) but its harder to copy videos onto it because I have to burn a DVD. We never use the DVD player.
I like the idea of using a video capable ipod, just gives more uses for the ipod. The big advantage for me of the touch, besides the much larger screen is for web surfing. Its a lots smaller than my Macbook.
Oh, and BTW, my office-mate lets his 3 yr old use his brand new iPod video ($250) in the car for the same purpose. I think thats even riskier given the hard drive in it.